Wednesday, November 9, 2005Click herefor a speech manuscriptClick herefor a pdf version

Dr. William Poole, President and Chief Executive Officer

of the Federal Reserve Bank of St. Louis

The 11thEconomic Policy Series Lecture featured President and Chief Executive Officer of the Federal Reserve Bank of St. Louis, Dr. William Poole.Dr. Poole explained how the U.S. current account has changed from a surplus to a deficit over the past decade.He has a more positive interpretation for this deficit than what one reads in the popular press.Indeed, he says it reflects the strength and stability of U.S. markets.

As many high income countries outside the U.S. are seeing a slowdown in population and economic growth they are reverting to the U.S. economy to achieve higher investment returns for less perceived risk.As Dr. William Poole explains, “U.S. investment opportunities make the United States something of an oasis of prosperity and stability.”

Addressed in Dr. Poole’s speech were two competing views: the trade deficit view and the capital market view.The trade deficit view implies a necessary devaluation of the dollar in order to balance the current account deficit. Rather than look at the current account deficit as a long-term problem, Dr. Poole perceives it to be a short-term phenomenon that will self-correct in the long term.With increased globalization the U.S. will likely have positive current account balance in the future.

Dr. Poole explained that the U.S. is very different than many other countries that have seen drastic inflation from current account deficits.The U.S. government is far more stable and liquid than these developing nations. Further, the deficit is almost 95% denominated in U.S. dollars, making it far less likely that those holding these assets would seek to cash them in hurriedly.

The St. Louis Fed President concluded with a note of optimism:

“We can all benefit from our good fortune in having access to increasingly safe, liquid and transparent financial markets. The United States has created for itself a comparative advantage in capital markets, and we should not be surprised that investors all over the world come to buy the product.”